Australia: Attempted inter-positioning of company fails

The Federal Court has found an employer who moved employees from
one internal company to another to avoid employee entitlements
guilty of sham contracting.

In Fair Work Ombudsman v Ramsey Food Processing Pty Ltd [2011]
FCA 1176, the court acknowledged that there may often be
overlapping management and operating in intragroup arrangements,
and that this is not illegal. However, in structuring companies,
employers with intra-group arrangements must tread carefully in
respect to the entity that will do the employing, ensuring there is
a connection between the "employing" company and the
company the employees do the majority of their work for, to avoid
the arrangement being classified as a sham.

Facts

Ramsey Group is a meat packaging and exporting business that
operates a South Grafton abattoir. In a previous Federal Court
decision in 2006 (McIlwain v Ramsey Food Packaging Pty Ltd [2006]
FCA 828), the court ordered four employing companies within Ramsey
Group to repay entitlements to 12 dismissed employees, with
penalties totalling $84,000. These employing companies included
Ramsey Food Packaging, Ramsey Food Packaging No. 2 and Ramsey Food
Services.

After the decision, the four companies informed their employees
that the Federal Court orders caused the companies to be insolvent
and ended their employment. However, the employees were invited to
approach a new company called Tempus Holdings Pty Ltd which
represented that it might have positions available and be willing
to "honour your entitlements". Tempus was registered as a
shelf company which had a benefit of an unqualified indemnity from
Ramsey Food Processing, and provided labour to Ramsey Food
Processing. It was part of the operational arrangement of Ramsey
Group that separate companies were established to play the role of
"employer" of staff at the abattoir.

It is worth noting that the ability of these insolvent companies
to pay debts or meet obligations depended on the provision of funds
by Ramsey Food Processing.

The employees worked for Tempus for about two years, until in
2008 Tempus ceased operating and terminated their employment. They
were not rehired by any other Ramsey Group company and on
termination they were collectively owed $33,683 in severance
payments, $16,219 in accrued annual leave and $10,234 wages in lieu
of notice. The employees sought these entitlements. The main issue
in the case was whether Ramsey was the employer of the complainant
employees or whether they were employed by Tempus.

Judgment

In identifying the relevant legal principles, Buchanan J
distinguished and analysed three different circumstances in which a
business might obtain labour for its own purposes without direct
employment:

Independent contracting – Buchanan J held that
nothing in the case suggested that there was an independent
contract for the complainant employees, and that they clearly
worked as employees. However, it was noted that Tempus had no
actual control over the work the employees performed, and that
since Tempus was not the employer, the true employer required
identification.

Labour hire – This is where a labour-hire company has
a relationship with those whose labour it provides (either an
employment or an independent contract), which provides labour to an
unrelated company. It is assumed the labour-hire company is
conducting a business of its own, and here Tempus does not fall
under this category either.

Intra-group arrangements – Buchanan J noted that in
these arrangements, there may be overlapping directorships and
shareholdings, as well as shared management and operations, and
noted that this is not illegal. However, in the case of a separate
employing company which is completely reliant upon a company to
which it purportedly supplies labour, with no assets and no
management status of its own, and exists only as a corporate shell
to protect another company (which does have assets) from liability
to employees, courts might not hesitate before pronouncing the
arrangement to be ineffective or even a sham.

Buchanan J considered two objectives of this arrangement
– first, the apparent "termination" of the
"employees" of the "employing companies",
thereby permitting the liquidation of the companies and the
extinguishment of any liability owed to them. Second, the objective
to ensure that Ramsey Food Processing would not become directly
liable to employees for their entitlements whether already accrued
or to be accrued. The arrangements, according to Buchanan J, were
devoid of any legal content and represented an attempt to prevail
by form over any substance.

Buchanan J observed that Tempus (and Ramsey Food Processing) did
not give effect to the legal separation which they asserted in the
evidence – that when Tempus became the employer, there
was no evidence that anything changed or that new employment
actually commenced for the employees concerned.

He referred to the principles for determining whether a person
or entity is the employer of an individual. Tempus failed every one
of these tests and Ramsey Food Processing satisfied all of them.
Tempus bore none of the characteristics of an employer. It had no
business of its own, nor did it earn any money.

With this, Buchanan J found that Tempus was not the employer of
the employees concerned. In terms of the arrangement used by Tempus
and Ramsey Food Processing, his Honour had no doubt that it was
legally ineffective, as well as a sham. He considered the meaning
of the work sham from the judgment of Lockhart J in Sharrment Pty
Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 454,
where "sham" was described as "something intended to
be mistaken for something else or not really what it purports to
be. It is a spurious imitation, a counterfeit, a disguise or a
false front."

Buchanan J held that the attempted inter-positioning of Tempus
between Ramsey Food Processing and the employees who performed work
in the Ramsey Food Processing business was ineffective to produce
the factual and legal consequence that Tempus was their employer
(Fair Work Ombudsman v Ramsey Food Processing Pty Ltd [2011] FCA
1176, [99]). The court found that in the relevant period the
employer of the concerned employers was Ramsey Food Processing.
Buchanan J concluded that the arrangements made for the
inter-positioning of Tempus between Ramsey and the employees who
performed work for Ramsey was legally irrelevant to the
identification of their true employer.

The arrangement was not only legally irrelevant and ineffective,
it was also considered to be a sham by the court due to its attempt
to prevail by form over any substance.

Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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